Video transcript

Voiceover: Let's think a little
bit about the labor market. In all of these videos,
whether we're talking about renting units or hiring people, these are huge oversimplifications,
but we're doing it in this way so we can apply
some of these basic ideas that we're being exposed to in this survey of microeconomics, so that we can apply those basic ideas to real world things. It's important to realize we're making huge oversimplifications and
often times the real context can be more complicated
or a little bit nuanced, but it gives us a way of
thinking about things. This is the unskilled labor
market, so people who don't have any specific training or
experience for a given job. The vertical axis is
their wage rate per hour. It's essentially the price of labor. This little gap here
shows I started at zero, but then I jumped up to five, six, seven. This right here is a quantity of labor. We're measuring that in
terms of millions of hours per month. Once again, we have this
little gap here, so we can jump to 20 million hours, 21 million hours. It's important to realize,
when we think about demand in the labor market, we're not talking about individual consumers, we're talking about employers. In most cases, demand comes from individual consumers,
but now the demand is coming from employers. These are the people who are
essentially buying labor. The supply is not coming
from corporations. The supply is coming from
the people who provide labor, so now it's coming from
individual workers. Now it is coming from workers. Let's just say that this market starts off completely unregulated,
so it has a natural equilibrium price or
equilibrium wage at $6 an hour and an equilibrium
quantity of labor supplied, which is 22 millions of hours per month. Let's say the government
in this hypothetical city or country says, "You know what? "$6 is a really low wage. "We have trouble imagining
how people live well "off of a $6 an hour wage." They say this right over here is too low. The government does not
like it and maybe many of their voters are
people making that wage, so they say, "Hey, you know what? "We are going pass some
well-intentioned legislation. "We are going to pass a minimum wage. "We are going to pass a law, minimum wage, "that says any employer has
to pay at least $7 an hour." $7 an hour. It has to be at least $7 an
hour, so this right over here is a price floor. This is a minimum price in the market. When we talked about rent control, that was a price ceiling. That was a maximum price for rent, now this is a minimum price for labor. Since the price floor, this
minimum price, is higher than the actual clearing
price, it's going to distort the market. Our price floor is right over here, $7. This right over here is our minimum wage. What's going to happen here? If you look at the demand side of things, the employers are going to say, "Wow! "If I have to pay $7 an
hour now, I can only afford "21 million hours of labor." They're going to say,
"I can only afford now "21 million hours of labor,"
but if you look at the workers they're going to say, "Gee,
if I can make $7 an hour, "more people are going
to be willing to work." Either an individual might say, "If I was working 40 hours
a week making $6 an hour. "If I'm making $7 an
hour, I'm willing to work "45 hours a week." Or there might be a
student who's on the fence, who says, "Wow! "Now wages have gone up
enough that it makes sense "for me to work." There might be someone
who's retired and now, at $6 wasn't enough for them
to come out of retirement, but $7 is. Maybe a stay at home parent
now says $7 is enough for them to come out of retirement or not stay at home anymore. The labor, the quantity
supplied of labor, in terms of hours, will increase. At $7 an hour, people
will be willing to supply that much labor, but
what's going to happen in this situation right over here? In this situation you
have all of these people who want to work, but there's only demand for this much work. Right here, this is going to
be an oversupply of labor. Another way to think about
it, there's only jobs for 21 million people now
and now 23 million people want to work. You're going to have 2
million people who are, by the classical definition of unemployed, people who are looking for work who can't find work now. Once again, this is
completely oversimplified, because at this point right over here, based on the way I just viewed that, you would have no
unemployment and we all know even when the economy is humming maximumly and there's no regulation,
there is some unemployment, just due to frictions in the market, people just randomly
quitting jobs or looking for a new job, so you
could almost view this as excess unemployment. Or you could view this as just a very oversimplified model and in
the ideal world you'd get close to zero unemployment. Now you have more people looking for jobs, because the wages have
gone, but fewer jobs, because the employers
are forced to pay more. If we make all of these
assumptions in the model and you just want to say how
many fewer jobs are there, because this, obviously, we're
talking about more people even looking for jobs
because the perceived wages have gone up. In the absolute level,
based on these linear supply and demand curves, before there was demand for 22 million jobs and that was what the quantity demanded
was and that's also where the quantity supplied was, but now its only 21 million. Based on this model, you're going to have 1 million fewer jobs. When you think about
it in terms of surplus. Before the minimum
wage, the entire surplus was this entire area over here. This entire area that's
below the demand curve and above the supply curve. This entire area was the total surplus and it was being divided
between the consumer surplus and the producer surplus. This right over here, between the price and the supply curve was
the producer surplus. The producer surplus, remember
the producers of labor are the individual workers. This was the benefit above and beyond the opportunity cost that
the workers were getting was this area right over here
that I'm doing in dark white or filled in white and
the consumer surplus or the employer surplus here was the value that the employers were
getting above and beyond the price that they had to pay. Now, in this situation of a minimum wage, now this is the set price,
this is the quantity of labor that is demanded. What you lose now, the
surplus that we lose is this quantity right over here. We could figure out
that area quite easily. Let's see, this height right
over here is 1 million hours per month, so it's going to be 1 million. I'll just write 1, we'll just
remember it's on millions. Times this height right over
here, which is $2 per hour. Times one half. If we just multiply these,
we get this whole rectangle for the area of the triangle,
we multiply it times one half. That gives us exactly 1 and the units are dollars per hour times
millions of hours per month, gives us millions of dollars per month. It becomes $1 million
per month of surplus, of benefit above and
beyond, of total benefit that is lost to this market
because of this regulation, if you assume all of the
things in this model. Just like we talked
about in the last video, we have a $1 million per
month dead weight loss. Now, not everyone loses here. Because the price is set up
over here, for the people who are working those first
21 million hours per month, their producer surplus has now increased, because the space between
what they're getting and their opportunity
cost has now increased. For those lucky enough
to actually have a job, those workers now do
have a higher surplus, but for those employers,
which is on the demand side right now, who are employing
those first 21 million hours of labor, they now have a
smaller consumer surplus or demand surplus or
employer surplus right there. For the first 21 million units
of labor, it's redistributing the pie between the
employers and the workers, but then because you are
making the wage higher, it's reducing the overall
demand, so there is, if you believe this model,
some job destruction taking place.